Sunday, August 23, 2009

SUMMARY:- Economic data provides a catalyst, expiration Friday skews some of the data.- SP500, NASDAQ rise for fifth week in six, dispatch the August high for now.- Liquidity continues to be the theme.- Existing home sales make it four in a row but check the sales mix.- Bernanke says economies leveling out but recovery hampered by credit- Europe manufacturing jumps to positive, takes the lead over US.- Late Friday OMB says deficit to rise, not fall as Administration claimed Thursday.- Stocks enter Monday with a stronger bargaining position.

Liquidity finds an opening Monday, trowels the money in to fill the dip.

The common theme in this market: have dip, will buy. 15% gain in July? So what? There was a dip on Monday and that means backup the cash truck and buy. All of that money printed by the world banks is not, as Bernanke once again confirmed Friday, is not, due to continuing credit issues, getting into the system. Thus it goes into the world financial markets. As seen in 1999 when the Fed flooded the US with Y2K money, when the cash is not used it goes into the market. Have dip, will buy.

Friday the buy on dips mentality was still in place though there was no dip. The futures were positive and stocks gapped higher at the open, then gapped again half an hour into the session as existing home sales data rose past expectations. Then there was the usual 4.5 hour flat line (usual for this week) followed by a rise into the last hour.

The action took SP500 past its August intraday peak as well as its November 2008 peak. NASDAQ and SP600 moved through the August highs as well, all notching new post-March highs. After the first down week in five last week, the market was back to notching weekly gains. We thought there might be more downside this week just to give the market a more normal consolidation, and thus we had the SPY puts to hedge for our upside. Didn't work out this week but after an upside expiration Friday, particularly with a breakout, a test often ensues to start the next week.

As for other markets, the dollar was off rather sharply thanks to some stronger European economic data (1.4340 versus 1.4223 Thursday). The dollar is once again quite weak, moving back toward its early August low. It is trying to work a lateral consolidation after the selloff into June and thus far it is holding over early August. That bounced oil up a bit further to 73.80, +0.89. A rather modest session for oil but the moves for the week were strong; so much for the double top that some predicted. If oil breaks $75 it is a short trip to 85. Gold was up; Bernanke spoke Friday and implied that credit would remain easy and that fueled some inflation concerns. That drove gold to 955.40, +13.70; knocking at $1,000 again and thus far that has been the barrier. Bond yields rose as investors continued to move away from treasuries after racing to them early in the week (1.09% 2 yr, 3.43% 10 yr). The 2 year is moving back up near the top of its range and we will see if it breaks on through this time. The short end is rising faster than the long end, but nothing right now that would indicate economic ramifications, i.e. no flattening to the extent of predicting economic slowing.

TECHNICAL

INTERNALS. Expiration Friday, and without any big moves midweek that are sometimes characteristic of expiration, Friday was set to show some big moves. Breadth jumped (2.8:1 NASDAQ, 4:1 NYSE); that did not really rival the Monday downside breadth but it was much stronger than the upside A/D line shown the prior up sessions. Does that mean much? It was expiration and a lot of positions were rolled out as the shorts were again squeezed since the market did not hold the downside. Thus you can't put a whole lot of stock in the move. Volume was strong as well, jumping above average on NYSE to 1.8B, rising 64% over Thursday. Impressive, but again driven by the same forces as breadth. Hard to draw a lot of concrete conclusions from it.

CHARTS. Thursday I detailed the concerns SP500 and NASDAQ approached the August peaks. Similar to June there was a small double top formed thanks to the Monday drop, and this third try at the level would be the lick log. Both SP500 and NASDAQ jumped over the log Friday, easily clearing that level with SP500 jumping the intraday August high as well. It still has 1044 to deal with, but one step at a time, right? It has been shooting down the resistance points one at a time and it is still at it. NASDAQ made a new post-March high as well though its pattern is not as convincing as SP500. NASDAQ sold harder and has rebounded sharply; maybe a V bottom here right at the top, but that is not the typical case. On the other hand it is getting a lot of help; SP600 jumped to a new post-March high as well, and Thursday I discussed the significance of the small caps hitting new highs and the better tidings that brings for the economy ahead.

Not all was candy and roses, however. SOX, an early leader in this rally, is lagging as it rebounds. A decent rebound no doubt off of the 50 day EMA and the June peak, but it has yet to take out the prior week's peak and still has the August high after that. That said, it is not that unusual for a leadership group to fall back some in a continuing rally as other sectors take the point. If SOX cannot make a new high as well, however, we will see what kind of drag that puts on the rest of the market.

LEADERSHIP. Energy was back in vogue the past week, particularly the last half, and it was leading Friday. With oil trying to breakout from the top of its range that is entirely within reason. With Europe and the US showing signs of manufacturing life (as discussed below), that only reinforce the gains. Further, it looks as if energy has further to go. For the same reason industrials were stronger, particularly on Friday; nothing like manufacturing improvement to send them higher. Transports are on a tear as well; the rails are running . . . on rails. After making a lot of money off of them in 2007 and early 2008 we did not catch this move. Some well placed kicks in the rear on that one. Truckers are not there yet, however, and they will be a key. The truckers have been in dire straits for three years now. Why are they not moving as are the railroads? Because rails deal with commodities, truckers with consumers. Commodities prices are being driven by Chinese hoarding, maybe some pickup in the rest of the world, and inflation. They are getting bought and sold and that means they are moved on rails. Now if truckers start showing life that, similar to the rise in the small caps, is a real economic positive. Software continues to improve as well, and some large cap techs are still moving higher. In short, there is still plenty of leadership, and after some old hands at the game such as energy pulled back they are moving up once more.

THE ECONOMY

It was a good week for the data with regional PMI's starting to swing positive, leading indicators putting in a fourth upside month, and existing home sales, 80% of the market, posting a strong surge. Those helped offset some weaker starts and rising weekly jobless claims, and indeed, that is a rather typical cycle: jobs lag the rest of the economy, and at 549K last week, we had better hope they are still lagging.

Existing home sales one part of a strong Friday data day.

Existing home sale rose 7% from June to July, and that was the largest gain in 2 years and marked the fourth straight month of gains. Finally some good news in the housing market.

Good news but look at the mix and you see what is driving the market. Most of the sales, over 30%, came from units priced at less than $100K. The next biggest segment was $100K to $200K. After that activity fell off rapidly. $250K to $500K was still down, and when you get to the higher prices it really tanked. $1M to $2M fell 23% while houses priced over $2M fell 32%. The $1M to $5M range was the fastest growing during the boom as many branched out into bigger homes and second houses in luxury resort areas. Those prices are really struggling as the second house market is very weak. Even primary dwellings in the high end are struggling. Hugh Hefner sold his house adjacent to the Playboy Mansion recently, but he got nowhere near his asking price; it went for $18M versus the $28M he wanted. Even Hugh had a hard time getting it up, price-wise at least.

The point: with the low priced units by far dominating the existing home sales market there are two conclusions. First, the first-time home buyers credit is the driving force right now. Prices are very low as most sales are still buys out of foreclosure properties. Lower prices combined with the first-time credit are motivating buyers, particularly as the credit is set to expire. That is moving them off the fence even though many still anticipate further housing price declines over the next few quarters. They buy now and risk some more downside versus losing out on the credit.

Second, the remainder of the housing market is still a long way from price recovery. Thousands upon thousands of new homes were built during the last boom to fill the desire for second luxury homes as well as big primary residences. Those are late cycle homes, very much discretionary versus early cycle need-based purchases (more of what we are seeing now). That means those markets are going to remain weak as long as the economic cycle is anemic. Thus we can see economic improvement, but without the kind of seriously strong economic growth that fuels new jobs and thus new big salaries, the high end of the market is going to languish. Not the very high end; the ultra-wealthy will have the means and thus that very tip end of the market will recover faster. It is the bulk of the higher end that will struggle. And that brings up point three: real estate agents are not getting rich off this market so don't go and try to tax them Congress.

Europe manufacturing jumps to positive as the US policies put us in the unusual position of playing catch up.

And we thought our regional PMI news was good. Both the NY and Philly PMI manufacturing reports turned positive in August. Well in Europe, the overall reports are already positive. The entire EU union rose to 50 in July. Germany, the largest economy in the union, surged 54.2%. All of the mixed data in the EU appears to be resolving to the upside.

Of course that sent the dollar crashing versus the euro, and the US ISM coming in a week will need to turn positive itself in order to avoid further degradation of our currency. It is an unusual situation of the US having to catch up with its European competition.

If there is anything that shows us the error of our fiscal ways, it is the fact that we are lagging Europe in a recovery. 2% GDP growth causes Europe to shut down for a month just to celebrate (as well as its central banks to raise rates to slow down the 'runaway' growth). 2% isn't even trend in the US.

What is clear: the stimulus passed has not unleashed the power of the US system. When the right stimulus is put in place our economy surges. In 2003 when the Bush administration finally got on track and passed supply side stimulus, almost to the day of passage the stock market took off (this was the second rally, the one after the initial surge off the lows in October 2002) and so did economic activity. Less than two quarters later GDP rose 7.3%. The stimulus thus far has helped employ some people in road work and the like, and it has sold some cars (at the expense of other items), but it is not generating that immediate surge of growth that gets things started as well as the following sustained growth as investment in business leads to new ideas, new companies, and ultimately new jobs.

Deficit: the Administration plays games with the numbers, but they keep rising.

Earlier last week the Administration lowered its deficit forecast to the $1.5T range. Why? Because it was not going to spend as much money on the bank bailout. It was going to withhold money it felt was no longer necessary. Less spending is always good and that was the reason for the reduction. No complaints about spending less money. Of course that doesn't mean the money won't be spent elsewhere (read healthcare), but as far as authorized spending, there would be less at least in one area.

Then on Friday, late Friday, the OMB came out with its updated deficit projections that take into account the reduced bank bailout spending. Even better right? You wish. The Deficit projection for 2009 was raised, not from $1.5T, but from $1.7T to $2T. The 10 year projection was raised from -$7T to -$9T. The reason: a slower than expected economy.

Wait a minute. Slower than expected? That spells a lot of trouble. Why? Because the Obama administration projected what were some pretty rosy recovery scenarios based on its $800B boondoggle stimulus. Those projections are not living up to expectations. Surprising? No. Worrisome? Yes, because the administration still has huge spending plans to come.

This projection does not even include, remotely, any of its healthcare change out. The plan is estimated, by the Obama administration, to cost $1T. First, the administration shows it doesn't understand economics as its projections are already significantly off. Second, history shows it is the nature of government programs to cost far in excess of rosy projections.

When passed Medicare was projected to cost $9B in 1990. In reality, Medicare costs that year were $67B. A mere rounding error by a factor of 6. Medicaid when passed in 1987 was supposed to cost $100M per year. Just six years later it required $11B of taxpayer dollars; off by a factor of 11 in less than a decade.

So, does anyone really believe in $1T? Take the average of the two and say the multiplier is 8.5. That adds $8.5T to the 10 year projection and makes the $9T look blissful. At $17.5T the US is pretty much insolvent. Picture a currency worth nothing.

THE MARKET

MARKET SENTIMENT

VIX: 25.01; -0.08VXN: 24.69; -0.28VXO: 23.81; +0.02

Put/Call Ratio (CBOE): 0.59; -0.13. Massive drop in the ratio as calls were bought to offset the downside speculation by the shorts.

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 48.3% down from 49.4%. This follows a steady rise past the 35% level that is the threshold for what is considered a bullish climate. It does not mean things are bearish; that takes a reading in the 60% range. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator.

Bears: 23.1% up from 21.3%. Rebounding some from the big drop two weeks back from 31.1% and 35.6% the prior week. Still a massive exodus from the ranks of bears. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.

NASDAQ

Stats: +31.68 points (+1.59%) to close at 2020.9Volume: 2.258B (+14.84%)

Up Volume: 1.859B (+484.792M) Down Volume: 403.92M (-165.883M)

A/D and Hi/Lo: Advancers led 2.79 to 1Previous Session: Advancers led 1.89 to 1

Nice breakout over a key, key level. There is still an intraday high at 1044 from October 2008, but after that there is a clean shot at 1100. That is why this November peak was such an important level.

A big upside expiration Friday can often lead to a weaker start to the week, but that is not always the case. Percentages say yes, but there are times it does not apply, say when there is too much world liquidity. Even with that, however, some testing of a break to a new high is normal.

Indeed, TESTING a breakout to start a new week is always better than leaving unfinished breakout business after a good rally to recover early losses as seen last week. That helps reduce the chances of a reversal from the resistance though you can always have a reversal session after a breakout. Given the surge higher in July that is what some are looking for and you have to be cognizant it could happen, but with all of the money in the market as evidenced by last week's recovery, the reversal scenario is less likely.

Now a pullback to test the breakout is great. There are stocks that jumped higher with gaps that we did not chase, and a pullback to test the gaps would provide great opportunity again. At the same time we have a lot of god new upside in place that we can let run on this new breakout by the indices as long as it holds and continues. And of course, if we get 2 or 3 more upside days under the belt many of our plays will be in prime position to bank some gain. It is running in a 2 to 4 week cycle of gains to profits and with this new crop of great plays we have positions in we will be looking to again bank some gain and enjoy the fruits of our labors a bit more.

Support and Resistance

NASDAQ: Closed at 2020.90Resistance:2070 is the September 2008 intraday low2099 is the mid-September 2008 closing low2169 is the March 2008 double bottom low

Support:2016 is the August peak1984 from late SeptemberThe 10 day EMA at 19831962 is the bottom of the August 2009 range.1947 is the October gap down pointThe 50 day EMA at 19041897 is the October post gap intraday high.1880 is the June peak1862 is the July peak1786 is the November intraday high1780 is the November 2008 closing peak1773 is the May intraday peak1770 is the mid-October interim peak1673 is the prior April peak1666 is the intraday January 2009 peak1664 is the May 2008 low1661 is the April 2009 prior peakThe January closing peak at 1653 (intraday)The 200 day SMA at 1650

S&P 500: Closed at 1026.13Resistance:1044 is the October 2008 intraday high1106 is the September 2008 low1133 from a September 2008 intraday low1185 from late September 20081200 from the July 2008 low

Support:The August intraday peak at 1018The November 2008 peak at 1006 closing 1007.53 intraday992 is the August 2009 consolidation lowThe 18 day EMA at 994The 50 day EMA at 961956 is the June intraday peak944 is the January 2009 high935 is the January closing high932 is the July peak930 is the May peak919 is the early December peak is bending899 is the early October closing low896 is the late November 2008 peak888.70 is the April intraday high.882 is the early May low878 is the late January 2009 peakThe prior April peak at 876The 200 day SMA at 876866 is the second October 2008 low857 is the December consolidation low

Dow: Closed at 9505.96Resistance:9625 is the October 2008 closing high10,365 is the late September low

Support:9387 is the mid-October peakThe 18 day EMA at 92359116 is the August low9088 is the January 2009 peak8985 is the closing low in the mid-2003 consolidation8934 is the December closing highThe 50 day EMA at 89278878 is the June peak8829 is the late November 2008 peak8626 from December 20028588 is the May high8581 is the July peak8521 is an interim high in March 2003 after the March 2003 low8451 is the early October closing low8419 is the late December closing low in that consolidation8375 is the late January 2009 interim peak8315 is the February 2009 peakThe 200 day SMA at 83138307 is the April 2009 intraday high8221 is the May 2008 low

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.